TOP NEWS

Friday, March 26, 2004

Interview: Colin Wallace, Publex Ventures

Colin Wallace is Managing Director of Publex Ventures LLC, a new public/private equities merger fund which is attempting to put a new twist on reaching liquidity. I spoke with Colin about Publex and what they are trying to do.

BK: What's the idea behind Publex?

CW: In today's economic environment, the principals believe that many
micro and small cap companies are willing to sell their stock and enter
into mergers and acquisitions and creative financing arrangements at
greatly reduced valuations in order to obtain the strategic and tactical
investments required to exponentially increase the market,
attractiveness and value of their stock. The Principals believe that
this provides the Fund with a great opportunity to invest in companies
at greatly reduced valuations while maintaining significant leverage on
assets and milestones to reduce risk.

Despite the downturn in the market, the venture capital industry
continues to grow - in 2002, 108 funds raised $6.9 billion in capital
commitments. Comparing figures from 2001, capital is being raised
faster than new funds are being created, raising the average fund size
in 1998 to $134.3 million (from $91 million in 1997). In addition, over
50% of investments in venture capital still come from institutional
public and private pension funds. Unfortunately for entrepreneurs,
capital requirements for early-stage companies are not increasing nearly
as quickly as the preferred investment size for the venture capitalists
that finance them. The Principals believe that because of the risk
typically associated with smaller early stage investments and the
heightened risk aversion after the terrorist attacks of September 11,
most venture capitalists typically pass over smaller (under $1 million)
investments. The Principals believe that a market of smaller
investments will continue to grow, but will also continue to be ignored
by large funds providing an opportunity for the Fund to fill the void,
negotiate highly favorable investment terms and generate the multiples
of early stage investment with lower risk and faster liquidity.

The most popular exit strategy for venture capital investments has
traditionally been an initial public offering. The primary driver of
this strategy is that on average, public companies sell at higher price
multiples than private ones, according to research conducted by
Mergerstat and Done Deals. The table below summarizes this trend:

In spite of the apparent premium afforded to public companies, only 23
venture-backed companies went public in 2002. The companies that went
public did so on a large scale: the average offering size was $85.6
million. However, the IPO slowdown was a major factor in the modest
9.6% returns generated by venture capital funds. The Principals believe
that this trend, combined with industry consolidation and the demand for
better returns, will drive strategic acquisition to become an equally
dominant strategy for exiting a venture capital investment. The
Principals believe that mergers and acquisitions are generally executed
more quickly, are more attractive to entrepreneurs because of SEC
restrictions on selling founders' stock to the public, and are not as
susceptible to volatility of IPO's. Additionally, the Fund may invest
in companies that will employ other liquidity strategies such as reverse
mergers and SB-2 filings.

BK: What's the major differences you see between what you will be doing and other venture funds?

CW: In a slogan "LIQUIDITY BY DESIGN" The Principals believe that there is significant value to be unlocked in
this environment and an opportunity to actually realize this value with
faster and more controllable liquidity.
To achieve this, the Fund's strategy is to invest in viable public
companies (cash-flow breakeven or better with predictable revenue) and
capable management teams, but require either additional funding or
synergistic acquisitions to enable these companies to achieve the
financial growth required to become highly attractive to investors and
acquirors. In parallel with the Fund's public company investments, the
Fund will seek to find and invest in promising early stage companies
that are synergistic to the public companies the Fund will invest in, or
have a substantial opportunity for rapid liquidity and that have
protectable, validated solutions but have not been able to raise
requisite cash through traditional venture sources. The Fund will
invest in such combinations with the intention of facilitating the
merger or acquisition by the public company of the synergistic
early-stage company. As well, the Fund will from time to time utilize
secured debt instruments that provide a bridge to exit and liquidity.

The Principals believe that investing in this manner will enable
immediate liquidity along with the superior returns associated with a
successful early-stage investment. The Principals believe the value
proposition to all involved includes:

. To Early-Stage Companies - They receive funding, coaching,
networking, and strategic consulting, obtain a stronger and more
realistic venue in which to launch and/or market their solution (the
public company), become significant shareholders in the public entity
and position themselves for fast and successful liquidity.

. To Public Companies - They receive funding and/or coaching,
access to a compelling new technology/product (from early-stage
companies) that will provide the company with a unique value proposition
and/or competitive market advantage, they get revitalized revenue and
profit potential and commensurate interest from analysts/investors with
immediate stock leverage.

. To the Fund - The Fund gets a stronger, lower-risk portfolio
with faster, more controllable exits and returns that are still
commensurate with early stage investments. For example, taking a $0.30
public stock to $6.00 provides a 20X return.

The Fund intends to make investments that are smaller than the
mainstream venture and investment banking firms prefer, but will pave
the way for participation of larger entities.

The Principals intend to utilize their specialized experience in early
stage, high-growth companies and markets to formulate strategies for
leveraging and merging target companies. The Principals are individuals
experienced in successfully operating and growing small companies into
successful enterprises. The Principals believe that they will be able
to provide entrepreneurs and senior managers with the capital,
resources, experience, and connections needed to move their companies
into the next stage of growth.

The Fund's approach to venture investing is to take a proactive role in
helping small companies merge with later stage companies and public
companies. While it is customary for venture capitalists to be involved
in strategic decision-making, our approach can also be very tactical in
nature, as we will assist, where appropriate and beneficial to the
company, in the areas of operations, sales, marketing, investor
relations, public relations and business development. This element of
our approach defines the difference between a source of capital and a
strategic financial relationship. It is this guiding principle that
embodies the investment philosophy of the Principals.

The Fund may also, when appropriate, utilize secured debt instruments,
warrant coverage, imbedded hedge, look back provisions, redemption
options and stock restriction and leak out agreements to provide greater
security that management of portfolio companies that the Fund invests in
will meet their milestones, especially regarding meeting deadlines for
providing the Fund liquidity.

The Fund's strategy is to look for opportunities in which experienced
managers & entrepreneurs are on the cusp of a breakthrough in a
high-growth industry. An ineffective technology/operating/financial/or
management strategy, or insufficient capital for expansion may be a
barrier that we can help break down Merging complimentary technologies
that bolsters the effectiveness of both companies is of major interest
to the Principals. The companies the Principals will work with should
be receptive to thinking openly about operational changes and mid-course
corrections that are often the difference between being a small business
and being a growth business.

BK: How did you, Bill Collins, and Mark Chasan come up with the idea?

CW: The Partners have all been professional "angel investors", investing
in seed round companies looking to have our investments supplemented by
senior up round Venture Investors who would inturn take the companies
through IPO and achieve a high multiple liquidity event. That model no
longer exists. It does not work for the "angel investor", the Venture
Capital Funds, nor the companies they invest in. The IPO market is all
but closed, the subsequent Venture Investors are investing in follow
financing to their currenlty illiquid investments, or they are investing
in such a narrow criteria as to displace most all early stage companies,
they in fact have become almost middle market investors, competing with
bankers.

Our approach was very simple, we needed to make our own liquidity events
happen and make them happen when we are engineering the original
investment. As frustrated "angel investors", we grew tired of the 7-9
year maturity cycle that the early stage investor is currently facing.
We were forced to alter the playing field or find a new investment
startegy. We did both. The current model is created from a very large
collective "PAIN", that is being experienced by "angel investors",
Venture Funds and the compnaies attempting to raise capital. The system
is broken, the old Angel Investor/Venture Capital/IPO model no longer
works, build a new model. Very basic entreprenuerial thinking.

BK: Where are you in raising your $40M fund?

CW: We are raising approximately 70% of the fund from Institutional
Investors currently frustrated by the broken Venture Capital model, and
from the Venture Capital companies themselves who seek liquidity from
their illiquid portfolio companies, and are working with our model and seeking
to invest in a "fund of fund" relationship. 30% will be found from the
High Net Worth "angel Investors", who like us are frustrated at the
current model.

BK: Have you made any investments yet?

CW: The partners have made five (5) investments in public compnaies that
we are working with to find strategic candidate companies. In addition
we are in due diligence with thriteen (13) companies that meet the
private/public critera for investment. We are hopeful that the fund will
be profitable before we actually close the finance round.